Estimating the Dynamic Effects of Online Word-of-mouth on Member Growth of a Social Network Site

The authors study the effects of word-of-mouth (WOM) marketing on member growth at an Internet social networking site. Because such sites track the electronic invitations sent out by existing members, outbound WOM may be precisely tallied daily and then linked to the number of new members joining the site (signups). To handle the potential endogeneity among WOM, new signups, and traditional marketing activity, the authors use a Vector Autoregression (VAR) modeling approach to quantify the shortand long-term effects of WOM referrals. First, Granger causality tests demonstrate the endogeneity among signups and WOM referrals. Second, wordof-mouth referrals have substantially longer carryover effects than traditional marketing actions. Specifically, the long-run elasticity of signups to WOM is estimated at close to 0.5 – about 2.5 times larger than the average advertising elasticities reported in the literature. The authors also report that the estimated WOM effect is about 20 times higher than the elasticity for marketing events, and 30 times larger than that of media appearances. Using the estimated Internet display advertising revenue produced by impressions served to a new member, the monetary value of a WOM referral is calculated, yielding an upper bound estimate for the financial incentives the firm might offer to stimulate word-of-mouth.